Journal Issue
Share
Article

Financial facilities: IMF borrowing and lending

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2002
Share
  • ShareShare
Show Summary Details

The volume of financing that the IMF has provided to its member countries has fluctuated significantly over time. The oil shock of the 1970s and the debt crisis of the 1980s were both followed by sharp increases in IMF lending. In the 1990s, the transition process in Central and Eastern Europe and the crises in emerging market economies led to another surge in the demand for IMF lending.

Only countries that are members of the IMF can borrow. Membership in the IMF is practically universal, currently comprising 184 countries.

Why and how does the IMF lend?

The IMF provides financial assistance to member countries with temporary balance of payments problems. It does not provide financing for specific purposes or projects, as development banks typically do (see “IMF at a glance” on page 32). The IMF’s Executive Board must approve financial assistance.

The IMF extends financing through three channels:

  • Regular financial assistance is made available—subject to interest at the IMF’s standard rate of charge—through a number of policies and facilities designed to address specific balance of payments problems.

  • The IMF provides low-interest loans to low-income member countries through its Poverty Reduction and Growth Facility (PRGF), which helps them restructure their economies to increase growth and reduce poverty. The IMF also provides grants or interest-free loans to qualifying members under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative to help reduce their external debt to sustainable levels. (For more information on the PRGF and the enhanced HIPC Initiative, see page 7.)

  • The IMF can also create international reserve assets by allocating SDRs to members, which they can use to obtain foreign exchange from other members and to make payments to the IMF (see page 28.)

Financing is provided under different facilities and policies (see table, page 21). The main ones are the credit tranche policies, which address members’ short-term, cyclical balance of payments difficulties, and the Extended Fund Facility (EFF), which focuses on external payments difficulties arising from longer-term structural problems. Loans under these facilities can be supplemented with very short term resources under the Supplemental Reserve Facility (SRF) to assist members experiencing a sudden and disruptive loss of capital market access.

The IMF levies charges on the financing. Charges and repayment periods vary by facility. The amount of financing a member can obtain from the IMF is generally based on the size of its quota.

The IMF has also developed special facilities that provide additional assistance for certain specific balance of payments difficulties, such as following a conflict or a natural disaster.

To discourage excessive use of IMF funds and free up funds for use by other members, the IMF levies surcharges on credit outstanding above a threshold level. The IMF also levies surcharges on SRF resources.

The IMF has introduced accelerated repayment schedules to encourage early repayment of IMF financing. Members are expected to repay on the earlier schedule (in advance of the standard repayment schedule). Members unable to meet the earlier repayment schedule may request an extension, but the repayment schedule cannot be extended beyond the standard repayment schedule.

Where does the IMF get its money?

The capital subscriptions of the IMF’s member countries are the primary source of financial resources for the IMF. Each member country pays in a subscription, equal to its quota, on joining the IMF (see page 26). The IMF also has two lines of credit with a subset of its members to supplement its quota resources in case of unusually high demand for IMF financial assistance. These credit lines, known as the New Arrangements to Borrow (NAB) and the General Arrangements to Borrow (GAB), currently are not in use. They were last activated in 1998 following the Asian financial crisis and before the most recent quota increase took effect.

The IMF is authorized to borrow from private capital markets and has considered the option on several occasions. It has, however, concluded each time not to do so because of organizational and operational drawbacks.

The resources for the PRGF and the HIPC Initiative are financed through contributions from a broad spectrum of member countries and the IMF itself. They are separate from the quota subscriptions and are administered under the PRGF and PRGF-HIPC Trusts, for which the IMF acts as trustee. The PRGF Trust borrows at market or below-market interest rates from loan providers—central banks, governments, and government institutions—and lends them to PRGF-eligible member countries at an annual interest rate of 0.5 percent. The PRGF Trust receives grant contributions to subsidize the rate of interest on PRGF loans and maintains a Reserve Account as security for loans to the Trust.

How much can the IMF lend?

The IMF has limited resources. Only a portion of its quota subscriptions is usable, because the IMF cannot use the currencies of members that it is assisting or that its Executive Board does not consider to be financially strong. The IMF’s liquidity position is further reduced by the existing demand for assistance—undrawn commitments under current IMF arrangements—and the need to always hold an additional amount of resources for working balances.

IMF facilities have different terms and conditions
Repayment Terms
ObligationExpectation
scheduleschedule1
Facility or policyCharges(years)(years)Installments
Regular facilities
Stand-By ArrangementBasic rate plus surcharge23¼-52¼-4Quarterly
Extended Fund FacilityBasic rate plus surcharge24½-104½-7Semiannual
Compensatory Financing FacilityBasic rate3¼-52¼-4Quarterly
Emergency AssistanceBasic rate3¼-53Quarterly
Supplemental Reserve FacilityBasic rate plus 300-500 basis points2-2½1-1½Semiannual
Contingent Credit LinesBasic rate plus 150-350 basis points2-2½1-1½Semiannual
Concessional facility
Poverty Reduction and Growth
Facility0.5 percent a year5½-103Semiannual
Memorandum items (applicable to regular facilities):
Service charge0.5 percent
Commitment charge25 basis points on committed amounts of up to 100 percent of quota, 10 basis points thereafter

Disbursements made after November 28, 2000—with the exception of disbursements of Emergency Assistance and loans from the Poverty Reduction and Growth Facility—are intended to be repaid on the expectation schedule, as are all repayments under the Supplemental Reserve Facility and the Contingent Credit Line

Surcharges are applied to the combined credit outstanding under the Stand-By Arrangements and the Extended Fund Facility of 100 (200) basis points on the amounts in excess of 200 (300) percent of quota

Not applicable

Data: IMF, Treasurer’s Department.

Disbursements made after November 28, 2000—with the exception of disbursements of Emergency Assistance and loans from the Poverty Reduction and Growth Facility—are intended to be repaid on the expectation schedule, as are all repayments under the Supplemental Reserve Facility and the Contingent Credit Line

Surcharges are applied to the combined credit outstanding under the Stand-By Arrangements and the Extended Fund Facility of 100 (200) basis points on the amounts in excess of 200 (300) percent of quota

Not applicable

Data: IMF, Treasurer’s Department.

Overdue payments

To maintain the cooperative nature and protect the financial resources of the IMF, and to keep other financial sources open to them, members must meet their financial obligations to the IMF on time. However, if a member does fall behind in its debtservice obligations, it is expected to take steps that will enable it to settle its arrears as quickly as possible.

The IMF’s strategy to help prevent new cases of arrears has three main elements:

Prevention. To prevent new cases of arrears from emerging, the IMF attaches conditions on the use of its resources, assesses members’ ability to repay, cooperates with donors and other official creditors, undertakes safeguard assessments of the central banks receiving IMF resources, and provides technical assistance to members.

Intensified collaboration and the rights approach.

Intensified collaboration helps members design and implement economic policies to resolve their balance of payments and arrears problems. It also provides for members in arrears to establish a track record of policy and payments performance, mobilize resources from international creditors and donors, and become current in their obligations to the IMF and other creditors.

In some cases, a country’s economic policies are formulated in the context of a “rights-accumulation program.” This program allows a country in protracted arrears—owing amounts to the IMF that are overdue by more than six months—to accumulate “rights” to future drawings of IMF resources through its adjustment and reform efforts. Future drawings are made only after the member has completed the program and cleared its arrears and the IMF has approved a successor arrangement. Only 11 IMF members were eligible for the rights approach and, of those countries, only Liberia, Somalia, and Sudan remain in arrears.

Remedial measures. The arrears strategy includes a timetable of remedial measures of increasing intensity to be applied to member countries with overdue obligations that do not actively cooperate with the IMF in seeking a solution to their arrears problems. Such measures can range from a temporary limit on the member’s use of IMF resources to compulsory withdrawal from the IMF.

Protracted arrears to the IMF increased in financial year 2002 to SDR 2.36 billion as of April 30, 2002, from SDR 2.24 billion a year earlier. This increase reflected the continued accumulation of new arrears by Zimbabwe—the first case of arrears accumulation under the PRGF—and further increases in arrears by most of the other protracted arrears countries. In addition to Zimbabwe, three other countries in protracted arrears—Liberia, Somalia, and Sudan—account for almost all of the overdue financial obligations to the IMF.

Since April 2002, the Democratic Republic of the Congo has cleared all of its arrears to the IMF (SDR 0.4 billion), reducing total overdue obligations to the IMF to below SDR 2 billion, the lowest level since March 1988. Bridge loans provided by Belgium, France, South Africa, and Sweden facilitated the arrears clearance. Following the clearance of arrears, the Executive Board decided to lift all remedial measures that had been imposed on the Democratic Republic of the Congo and restored the country’s eligibility to use IMF resources and its voting and related rights in the IMF. This decision also paved the way for the approval of a three-year SDR 580 million PRGF arrangement.

What does the IMF charge to borrow?

The IMF, like other financial institutions, earns income from interest charges and fees levied on members using its resources. In addition, the IMF also earns interest on its holdings of SDRs, an interest-bearing reserve asset.

The basic rate of charge on the use of IMF resources is determined at the beginning of the financial year to achieve an agreed net income target for the year. This rate, a proportion of the SDR interest rate, is set so as to cover the cost of funds and administrative expenses as well as add to the IMF’s reserves. At year-end, any income in excess of the target is usually refunded to members that paid interest charges during the year, and any income shortfalls are made up the following year.

In addition to basic charges, the IMF also receives income from debtor members in the form of service charges, commitment fees, and special charges on overdue principal payments.

The IMF levies surcharges to discourage excessively large use of credit in the credit tranches and under the Extended Fund Facility, based on the total amount of credit outstanding relative to each member’s quota. The IMF also imposes surcharges on financing under the Supplemental Reserve Facility and the Contingent Credit Lines, two facilities under which the amounts of financing provided to a member are large. Income derived from surcharges is added to the IMF’s reserves and is not taken into account in determining the net income target for the year.

The IMF increases the rate of charge to borrowers and reduces the rate it pays creditors to distribute the cost of overdue financial obligations evenly between creditor and debtor members. When member countries settle their overdue charges, the IMF refunds the additional amounts collected. The same mechanism is used to finance additions to the IMF’s special contingent account, which has been established to protect the IMF against potential losses from members’ ultimate failure to settle their financial obligations.

The IMF conducts Safeguard Assessments to provide assurance that the central banks of members receiving financial assistance have appropriate controls to manage their resources.

Safeguarding IMF resources

The IMF conducts Safeguard Assessments to provide assurance that the central banks of members receiving financial assistance have appropriate controls to manage their resources, including IMF disbursements. Safeguard Assessments are conducted at central banks because they are typically the direct recipients of IMF resources.

The safeguards policy was initiated in March 2000 on an experimental basis against the background of two countries under IMF-supported programs providing inaccurate information on international reserves and allegations of misuse of IMF resources. During the Safeguard Assessments, IMF staff examine internal control, accounting, reporting, and auditing systems at the central banks of borrowing members and propose remedies to address any vulnerabilities they identify. In some cases, the proposed measures need to be implemented before further disbursements of IMF resources are made to the member in question.

Top 12 IMF borrowers, 1947–2001

(cumulative drawings during period; billion SDRs)

Data: IMF Treasurer’s Department

As a result of the safeguards policy, central banks have become more aware of the need for transparency and proper governance. The policy has also enhanced the IMF’s reputation as a prudent lender.

Other Resources Citing This Publication